Speculation or market forces? What drives the EU ETS price and what does this tell us about abatement costs

The EU Emission Trading System has been one of the central pieces of climate legislation for the European Union countries since 2005. Over these 15 years, the price of an EU ETS Allowance (EUA) has fluctuated greatly, dropping to very low levels for many years before rallying to new heights in recent months. In this paper, using various Indicator Saturation methods, we explore to which degree the EUA price was driven by financial market speculation or by underlying market forces, such as fossil fuel prices. Using recently developed methods, we are able to quantify how these price dynamics have changed over time, which further allows us to analyse how announcements of policy changes have changed the price expectations in the market.

This is joint work with Ryan Rafaty and Susana Campos-Martins